• David Klein

Where To From Here For The New CenturyLink

CenturyLink (CTL) and Level 3 Communications (LVLT) posted their last stand-alone results now that the merger has been consummated. CenturyLink appears to have deeper problems than originally known at the time the deal was struck. On the other hand LVLT seems to be holding there end of the bargain. What am I talking about? Actual revenue trends vs. the trends put forward by both management teams in the proxy filed in December 2016. CTL's performance is, in a word, terrible. LVLT's enterprise business is growing while CTL's enterprise which I define as Strategic and Data has reversed course wiping out gains from LVLT. Here's how I see it:

The top blue line is the combined revenue laid out in the proxy. The line below is the trend which assumes management can reverse the recent negative trend on the CTL enterprise revenue. The unknown is what problems and how deep they run are causing the less than acceptable performance. Well unknown to the investor other than the lip service on the conference call. The positive is LVLT's management team is probably more qualified to turn this ship around than CTL's but as with everything else it takes time.

The above numbers are reflected in the tables below:

Share dilution is 1% which affects future dividend payouts.

The elephant in the room; is the dividend safe? First all numbers reflect actual free cash flow not adjusted free cash flow. Why actual? Because it reflects the actual cash available to support the dividend. I get concerned when companies start throwing around "Adjusted" free cash flow numbers. FTR comes to mind; they used adjusted free cash flow to show investors how safe the dividend was only to cut it since actual free cash flow could not support it.

The dividend will suck all available free cash flow through 2018 if the above trends are met.

Exceeding these expectations is all the better. Looking ahead shows an improving picture, again if current negative trends can be reversed. All this hinges on how deep the problems are on the old CTL side of the business. Plenty of uncertainty which the stock is reflecting. The reward is substantial if you believe management can match their rhetoric from the conference call. If not a dividend cut is in the cards.

I'll update the fair value for LVLT on the fair value list web page as more information becomes available.

Disclosure: I am long CTL both in stock and options.



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